The consequences of former Prime Minister’s Matteo Renzi’s failed referendum roll on. Italy now has a new Prime Minister, Paolo Gentiloni, who has been asked to form a new government. Assuming he can do so, one of his first tasks will be to rescue — however this is to be done — the “struggling” Italian bank, Monte dei Paschi (MPS). On Friday, MPS’s regulator at the European Central Bank denied their request for an extra five weeks to come up with a (private) capital injection. That makes Gentiloni’s task, which seems likely to be a cobbled together public solution, urgent. If we see the central conundrum of the MPS affair as the tight coupling of financial and political risk, that coupling has, if anything, grown tighter. In this post, I’ll look briefly at Paolo Gentiloni, give some detail on the timing of upcoming political milestones in Italy, and then look at the MPS situation.

But first, a caveat on Italian politics generally. From by Francesco Sisci:

[The] political balance of power in Italy [is a] a mystery coated in cryptography for foreigners and a national pastime, like football, for Italians. Moreover, in the wake of the vote, everybody is claiming a win, which is typical for Italian politics. Each enemy of recently resigned Premier Matteo Renzi, who pushed for the referendum and urged “yes” votes, all maintain that the 60% of “no” votes are theirs, and not motley pool of different opinions as they possibly are. Renzi conversely argues that the 40% who voted “yes,” which is slightly more than his party’s share of support, were on his side.

So I’m going to try to be careful not to project American political conventions onto Italy, or get out over my skis on the art of the possible, to mix clichés horribly. As ever, NC welcomes comments from readers based in Italy, or those knowledgeable on Italian politics and finance.

Paolo Gentiloni

Italy’s President, Sergio Mattarella, requested that Paolo Gentilon, as Prime Minister, form a government , and finding that a majority could not unite behind a candidate. Gentiloni is widely seen as a placeholder for Renzi, :

Paolo Gentiloni, the man named Sunday as Italy’s new prime minister, is a trusted ally of his predecessor Matteo Renzi, to whom he owes his rise to the summit of national politics.

Even before he was named, opponents were suggesting the silver-haired foreign minister had been hand-picked by Renzi as a stand-in leader who is dull enough not to pose any threat to the outgoing premier’s comeback hopes.

Renzi, who resigned last week after a crushing referendum defeat, remains leader of his Democratic Party (PD) and has made it clear he plans to fight the next election as its candidate to head a new government.

Gentiloni[1] :

Born to an aristocratic family, has the title Nobile

Worked as a journalist on an environmental magazine

Elected to parliament in 2001

Communications minister from 2006-08

Appointed foreign minister in 2014

In fact:

Until a few days ago, Mr Gentiloni’s name was not even mentioned as a possible prime minister. Paradoxically, this apparent lack of prominence and ambition may have been what persuaded others to support him. After a period of high drama, Italy often picks a workmanlike, conflict-free figure as a new leader.

I’m not so sure about “conflict-free.” Or “Italy often picks….” Italy? Italy, which I take to mean the Italian electorate, rejects Renzi’s referendum, and Renzi, by a ginormous 20% margin, and then Renzi’s mini-me gets to form the successor government? Is that more than a little sketchy, or am I projecting?

Political Milestones

The first thing Gentiloni needs to do is pick his ministers and form a government. :

After holding consultations with the other parties, Mr. Gentiloni will choose his ministers and then the new government will be sworn in. The premier and his new cabinet will then be required to win confidence votes in each of Italy’s two parliamentary chambers to fully take power. That will likely happen before this Thursday, thus allowing Mr. Gentiloni to represent Italy at a European Union summit that day.

(, which doesn’t seem to cover banking). Then comes the question of actually electing a government. :

Everybody is shouting for a new vote, although there presently is no clear electoral law.

That’s because the status of Italy’s current electoral law is in limbo. :

Italy is awaiting a critical decision by the constitutional court on the legal status of the country’s electoral law. The ruling is expected on 24 January. Once the decision is heard, it will have major consequences on how parliamentary seats are distributed in future elections.

If things go according to Renzi’s plan, Gentiloni would resign and new elections would be called once the electoral law is changed to reflect the court’s ruling. If Renzi can maintain the backing of his party, he will probably then lead the PD into the next elections.

However, it’s hard to know how or when the electoral law would be changed. :

Italy’s President Sergio Mattarella wants parliament to draft a new electoral law before any ballot is held, a source close to the president said on Tuesday, a move likely to delay any vote after Prime Minister Matteo Renzi resigns.

The next parliamentary election is not scheduled until 2018 but on Tuesday there was growing consensus among party leaders for it to be held a year earlier. Interior Minister Angelino Alfano said the vote should be held in February.

So, two months out, two years out… But who’s counting? I said “milestones,” but a more appropriate metaphor might be buoys bobbing in choppy, murky waters, and drifting instead of being anchored. Not re-assuring with regard to political risk!

The Monte dei Paschi Rescue

And now we turn to the twisiting and turning of the MPS saga. Can this bank be saved? describes the original private sector rescue plan, which relied on the good graces (and who knows what else) of Qatar:

Pre-empting the [ECB stress] test results, Monte dei Paschi devised a plan with two investment banks, J.P.Morgan and Mediobanca. It would dispose of €27.7bn-worth (gross) of bad loans. The beautified bank would be injected with €5bn of equity: some from a voluntary debt-for-shares swap which has already raised €1bn; the rest from a share issue, with an “anchor” investor, likely to be Qatar’s sovereign-wealth fund, providing the bulk. In October, Monte dei Paschi also unveiled a new business plan.

Sadly, Qatar is now unlikely to assume the financial risk in view of the political risk. :

[B]ankers said Qatar was not interested in investing until it received clarity on the formation of a new government, which may not be in place before January.

And as we’ve seen, an elected (that is, a fully legitimate) government is months or years away. So I think I we can cross private investment off the list of options. :

There is a chance, although it is vanishingly small, that a new government is formed over the weekend that looks stable enough for large investors, including Qatari and U.S. funds, to commit to backing an MPS share sale. That would allow the bank to launch a wider public sale and see if it can meet its target.

The political risk was bad before the referendum, and after the referendum it got much worse. Hence Italy’s request to MPS’s regulator for more time to put the deal together, a request that was denied on Friday. :

MPS asked the ECB’s supervisory arm for an extra five weeks to pull off a last-ditch €5bn equity injection for the lender, which emerged as the weakest in the European bank health check this summer and had already burnt through €8bn in equity in the past four years.

The board of the Single Supervisory Mechanism, the ECB unit charged with banking regulation, made the decision to reject MPS’s request at a meeting on Friday, the people said.

The ECB seems to have decided that since they were going to pull the plug anyhow, they might as well not wait. :

The answer was no. This is most likely because European regulators worried that if they granted one extension from the Dec. 31 deadline, there was no guarantee that they wouldn’t be asked for another and another, all while allowing the problems of more Italian banks than just MPS to fester.

With no capital injection from private sources, and the ECB unwilling to grant a delay, the only option left is intervention by the Italian government (assuming that one such exists). :

Analysts said it was extraordinary that the ECB had ignored pleas for a delay given that Italy has been chaos since the collapse of Matteo Renzi’s government, and that it should have dropped its bombshell during trading hours.

“The decision is very strange. They are giving the impression that they want blood on the floor, perhaps by forcing a resolution of the bank to set a precedent,” Lorenzo Codogno, ex-chief economist of the Italian treasury and now at LC Macro Advisors.

“There is a risk that there could be panic and a chain-reaction if investors start asking who is going to be the next victim,” he said.

The treasury is expected to opt for a “precautionary recapitalisation” to meet the €5bn target set by EU regulators, but this amounts to state aid. It requires a “bail-in” of bondholders and depositors over €100,000.

“Precautionary recapitalisation” is as easy as it sounds. First, the process will be undertaken for the first time with MPS. A great time to work out the bugs! :

A new European system to deal with failing banks was launched at the start of the year. So far it remains untested. Monte dei Paschi, Italy’s third-largest bank which needs to raise €5 billion ($5.37 billion) of equity, could prove a baptism of fire for the new setup.

Second, it’s a political horrorshow, because bondholders will take a haircut — and :

A large chunk of the junior debt that would be written off is held by local Italian households. Monte dei Paschi sold around €2.1 billion of junior debt to its customers as savings products. Leaving them out of pocket is seen as politically unacceptable. EU rules say that 8% of all liabilities need to be wiped out before taxpayer money is injected. That is a lot of lost savings.

Avoiding wiping out junior bondholders requires another leap and obscure EU rules published in 2013. These state that, in exceptional circumstances, bailed-out banks can hold back on nixing debtholders if that would jeopardize the country’s financial stability.

shares the same sunny outlook:

There may be room for manoeuvre. … Even with a precautionary recapitalisation, bondholders have to bear some of the burden. But with some nifty legal footwork they could be compensated without falling foul of state-aid rules. Many who bought bank bonds were under the false impression that they were as safe as deposits. Even so, sorting out compensation for mis-selling could be a messy affair.

(Well, that “messy affair” was a cloud moving in, wasn’t it?) :

There may be some flexibility for banks deemed systemic under EU rules but not much.

Italy will be allowed to reimburse those savers who were coaxed into buying bank bonds without understanding the risks. But the permitted rebates are on a case-by-case basis. They are partial, means-tested, and slow.

How nice. Like HAMP!

And now enter the Germans. From today’s :

European Central Bank policymaker Jens Weidmann has said state involvement in the rescue of Italian banks can’t be ruled out, piling further pressure on the Rome government to bail out Monte dei Paschi di Siena.

“The participation of the state alongside investors in a crisis solution can never be excluded,” Mr Weidmann told the Frankfurter Allgemeine Zeitung’s Sunday edition.

Mr Weidmann, the hawkish president of Germany’s Bundesbank, did not mention Monte dei Paschi di Siena, Italy’s third-largest bank and the world’s oldest, by name in the newspaper interview.

And with regard to the bail-ins:

Since the 2007-09 financial crisis, the European Union has adopted rules that make state aid a last resort when it comes to helping troubled banks.

Mr Weidmann justified state involvement by arguing that “investors particularly worthy of protection” had to be spared, the newspaper reported.

The paper reported Mr Weidmann as saying he could imagine targeted state transfers to investors who had wanted to buy conservative financial products, but quoted him as adding: “The bail-in rules should not be softened.”

In a bail-in, creditors and depositors take a loss on their holdings.

If I read this correctly — my interpretation is suspiciously unhawkish — Weidmann is urging that the junior bondholders have to take their haircut (“the bail-in rules”), but that the state can compensate them for it (“targeted state transfers”). If so, the sunny optimists might be right. At least for now, and assuming the targeted state transfers aren’t a HAMP-like horrorshow.

Conclusion

MPS is just the tip of the landfill. Italy has rather a lot of bad banks with rather a lot of bad debt. :

Non-performing loans on their books amount to a combined €360 billion, roughly a third of the eurozone’s total bad debt.

Even if you only consider the capital injections Italian banks need to stagger onward, it’s still rather a lot. :

What could trigger a crisis? The sorry state of Italy’s banks. A few urgently need an injection of fresh capital: at least €5bn in the case of Monte dei Paschi di Siena, considerably more in the case of UniCredit. Estimates of the total amount of capital needed to secure all banks approach €40bn, 2.5 per cent of gross domestic product.

With no growth, how can Italy do anything but kick the can down the road? A flatlined economy is the ultimate tight coupling of political and financial risk.

NOTES

[1] As an example of the difficulties of writing about Italian politics, we have these two seemingly diametrically opposed “facts.” :

[Gentiloni] served as the chief broadcasting watchdog during the second term of conservative prime minister and media mogul Silvio Berlusconi. In that role, he frequently clashed with Berlusconi and criticised the conservative premier’s grip on Italy’s major broadcasters. He also helped defeat legislation that would have expanded Berlusconi’s control of Italian media.

:

On the other hand: [Mr. Gentiloni] has a good relationship with former Premier Silvio Berlusconi as a result of Mr. Gentiloni’s stint as communications minister in the mid-2000s

[2] : “Italy is to nationalise Banca Monte dei Paschi di Siena as soon as this weekend, wiping out investors in a dramatic escalation of the country’s banking woes and political crisis.” There’s some wiggle room in “as soon as.” I haven’t seen it yet.

About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered.
To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.

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23 comments

Until a few days ago, Mr Gentiloni’s name was not even mentioned as a possible prime minister. Paradoxically, this apparent lack of prominence and ambition may have been what persuaded others to support him. After a period of high drama, Italy often picks a workmanlike, conflict-free figure as a new leader.

It would be a stretch, but perhaps the writer was thinking of the Roman emperor Nerva, chosen by the Senate to succeed Domitian after the latter was assassinated. Nerva was seen as old, not likely to live long, and yet committed to the dominant order — and someone likely to choose a successor wisely.

Ahhh, the Beeb. Just a point of information in an otherwise astute post. (And not “astuzie” in the Italian sense.)

Nobile: I had to look it up, because I haven’t encountered it. Basically, Gentiloni comes from gentry in the Marche, yet the Republic doesn’t recognize titles. Nor would his background–he went to a Montessori school for his primary education.

What Italy could do is set up a Postal Checking System for all its citizens but being non-monetarily sovereign the temptation to borrow from it would eventually become too great, is my guess, including the temptation to lend its reserves to private banks for interest.

If Italy truly has a Postal Checking System or equivalent then two questions:
1) Why would Italy’s citizens lend to private banks anyway?
For interest? Then:
2) Why should we care if interest seekers have miscalculated?

In other words, if Italy’s citizens have a choice (unlike US citizens) to not use private banks, credit unions, etc. then why should we pity them if they do so anyway for the sake of greed?

Not that I know if Italy truly has a convenient, easy to use, inherently risk-free Postal Checking Service. I suspect not since BancoPosta is a publicly traded company.

I have seen no news stories to that effect. I don’t know what an Italian bank run would look like (meaning you can walk, not run, to get to the coffee tin buried in the back yard, and maybe there are non-bank institutions). Just trying not to project.

Proclaimed and pronounced…there are bad loans because the loans can’t be paid or has it been a nod and a wink and just dont send in the payment…just like with greece…other than banner headlines…where are these actual bad loans…it is the euro being talked down again and again and again…msp has purported major derivative losses…but that was not bad bank loans…that was the mountebank casino…my having been married to or dated for long periods women who were italian or had duel citizenship doesnt turn into knowledge of italy…and bari and brindisi being important trade cities with ithaki does not lead to vast knowledge of the web of dysfunction known as the united principalities and kingdoms of italy….

But other than under the fold headlines in italian papers pushed aside by corner kicks and half naked women…it would be nice to have some actual stories in european publications and media of real loans and not just experts talking to experts about what experts are proclaiming…

And as to covering for the folks who handed off savings in return for a stack of dead trees with the title page captioned

“investment getaway vehicle”

If these were real loans with needed write downs, could not a simple “affordable housing tax credit” be handed out so these folks could “sell” their losses and come out even…tax policy in theory is not govt handouts…

For some weird reason I used to follow Italian politics while in high school (early 60s). It seemed that every six months or so there would be an “Italian government crisis”. After awhile I began to realize that the word crisis had a unique definition in that context,perhaps something along the lines of normality.

So, I’m an italian who voted “no” at the referendum, I don’t think that Renzi resignation is a problem, and I think that this all is blown out of proportion.

First, an explanation about the referendum:
The italian political system was designed after the end of WW2 with fresh memories of fascism and, perhaps, a fear that the communist could win the first elections.
A charachteristic of dictatorial system like fascism but also soviet communism was that the executive (the government) gained an extreme power over the legislative (the parliament) and consequentially could roll over all the oppositions.
As a consequence, the italian system was designed in such a way to empower the legislative (the parliament) over the executive, thus creating a system where the government enters in a crisis every year or so:

1) Italians don’t vote for the government, they only vote for the two chambers of the parliament and the senate, that have exactly a duplicate role but a slightly different electoral law, so that the weight of each party in the two chambers is different.
2) The two chambers have to vote each law and each chamber can propose changes to each law, so that often laws are “ping-ponged” from a chamber to the other a lot of times, thus creating the “gridlock”. This, in my opinion, was entirely in the intention of the ones who crafted the italian constitution, again as a measure against dictatorships.
3) The italian government is not directly voted, rather when there are new elections for the parliament and the senate, the “president of the republic” (a supposedly super partes figure IMHO similar to the crown in the UK) has some consultation with the elected political parties, and proposes a “primo ministro” (the actual premier). This premier then proposes a government to the parliament and the senate, and the two chambers can accept or reject it. This is the one and only democratic check on the italian government, that in all other respects is unelected; on the other hand the two chamber can send the government home more or less at any moment. Thus the fact that governments fall often in Italy is entirely natural IMHO.
4) When a government falls, the “president of the republic” has to propose a new premier. Only in the case that the two chambers refuse to accept the new premier, and the prez. can’t find a candidate who would be accepted, the prez. can call for new elections.

Over time, many people in Italy came to the conclusion that this system is too barocque and gridlocked, and that it should be simplified. In addition, IMHO mostly for “marketing” reasons, italian elections become more and more “personalised”, for example a crtain group of parties declare themselves “for Berlusconi” and the other “for Renzi”, and many (most) italian vote with the idea that they are voting for the government. This isn’t true legally, but causes a lot of handwringing when there is a “crisis” and people end up with a premier who is not the one they tought they voted in. Note however that this isn’t really a disfunction, the problem is the disconnect between the way the system works (parlamentarian) VS the way the system is marketed during political campaigns (as if it was presidential).

Renzi’s proposed costitutional change was basically to remove one of the two chambers (the senate) so to remove the “ping-pong” effect and remove the gridlock.
The reason I voted “no” is that, with only one chamber, with the fact that now the system is majoritaian (whereas in origin it was strictly proportional), and most importantly that the goverment isn’t elected but is only an “exension” of parliament, the system could become a “winner take all” one where when one party won the elections it could steamroll all the oppositions, something that I don’t like.
Other people voted “no” for different reasons.

Now, why I think the whole story is overblown:
First of all, the fact is that a fall in the government is totally natural in the italian system, and second, Renzi’s government was born this way:
1) in the last elections, three groups won each more or less 30% of the vote, in this order: Center left, M5s, Right. Initially, the center left (who won but by a small margin) proposed to the M5s to form a government together, but the M5s refused any proposal; therefore the center left made a bipartisan government with the right, electing a guy who was on the right of the center left.
2) subsequently this government fell as usual and Renzi, the new leader of the center left, created a new government, again together with the right.
So the present government is already of the “compromise” kind.
Now, even if we actually get to new elections, it is unlikely that the new situation will be very different from the one of the last elections, because even if the M5s, or the right surpasses the center left, they still most likely will have less than the 50% of the votes, so we would again get in a “compromise” government.
The only big difference would be if the M5s, after the next elections, chooses to take sides with the center left or with the right, but it still seems unlikely.

Furthermore, the choiches of the italian government are strongly limited by Bruxelles, so I don’t think that a new italian government can do something very different from what Renzi is doing (lobbyng for a more expansive fiscal policy), unless either the M5s or the right choose to exit from the Euro, something that seems unlikely to me and anyway would take a lot of time.

As an Italian ( who incidentally voted “no” as well ) I suscribe much of Mister Mr explanations,neglecting some passing discrepancies ,moreover I’d put a big big emphasis on the last “Furthermore….Bruxelles etc” paragraph . Never forget that our dubious privilege , maybe because of Italy’s size, was to have a “troika emissary “, but with Italian passport , I mean Monti.